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spk02: Welcome to the Quidel Ortho third quarter 2022 financial results conference call and webcast. At this time, all participant lines are in a listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared remarks. Please note this conference call is being recorded. An audio replay of the conference call will be available on the company's website shortly after this call. I would now like to turn the call over to Brian Brockmeyer, Vice President of Investor Relations. Brian?
spk06: Thank you, operator. Good afternoon, everyone, and welcome to the Quidel Ortho Third Quarter Financial Results Conference Call. With me today to discuss our financial results are Doug Bryant, Quidel Ortho's Chairman and CEO, and Joe Buskey, Quidel Ortho's Chief Financial Officer. This conference call is being simultaneously webcast on the Investor Relations page of our website. and a version of today's presentation can be downloaded there. Before we begin, I will cover our safe harbor statement. The statements we will make during this call about the company's future expectations, plans, and prospects include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a safe harbor for such statements. Our use of forward-looking statements is subject to a number of risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors identified under risk factors in our quarterly report on Form 10-Q filed with the SEC on August 5, 2022, and subsequent reports filed with the SEC. Please refer to our SEC filing for a more detailed discussion of forward looking statements and the risks and uncertainties of such statements. We cannot assure you that the forward looking statements we make or are implied by our statements will be realized. Furthermore, such forward looking statements represent management's judgment and expectations as of today. Except as required by law, we undertake no obligation to update any forward looking statement or any time-sensitive information to reflect future events, developments, or changed circumstances for any other reason. Also, during today's call, to facilitate a comparison of the company's operating performance from the third quarter of 2021 to the third quarter of 2022, we'll be discussing supplemental third quarter 2021 revenue and other supplemental adjusted operating results as if Quidel and Ortho have been combined for the applicable periods. We will refer to this information as our supplemental combined information. This supplemental combined information as well as certain other items we will discuss do not conform to US generally accepted accounting principles or GAAP. Please see slide three for a list of non-GAAP measures. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this afternoon. both of which are available on the investor relations page of the Quidel website. Lastly, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call, are given on a comparable constant currency basis. Now, I'd like to turn the call over to Doug Bryant, Quidel Ortho's chairman and CEO.
spk01: Doug? Thanks, Brian. Good afternoon, everybody, and thank you for taking the time to join our call today. The first call in which we are reporting results achieved as a combined company. When I look at our financial results for the quarter of this year, the third quarter, the underlying base business grew 6% year-over-year. Despite industry-wide headwinds, constant currency revenue growth excluding COVID-related revenue grew 3%, driven by strength in our point of care and transfusion medicine businesses. The Beckman BNP assay transition was a three percentage point headwind to revenue in the quarter. Adjusted EBITDA margin of 29% and adjusted EPS of $1.85 reflect very good operating leverage and solid earnings for the quarter. These better than expected results position us to raise our guidance for the full year, which Joe will share in further detail in a few minutes. For the remainder of my comments, I will focus on the strategic priorities that I had outlined on our last earnings call, which are one, integration and corporate culture, two, product innovation, three, global commercial excellence, four, operational excellence, and five, capital deployment, beginning with the integration and our corporate culture. As I've mentioned previously, the integration of the organizations and preserving the best attributes of both cultures is the top priority for the executive team and especially for me. While it's still the early days since the close of the transaction, we're off to a strong start. Many teams across the organization have demonstrated exceptional focus, agility, and shared purpose as we've introduced new structures, processes, and systems to optimize our operations. I must say that communication and collaboration across the entire company, even among teams that weren't initially fully integrated, have exceeded my expectations. The leadership teams two levels below the office of the chief executive are established. And over the last quarter, our operations team implemented its new structure, joining finance, R&D, HR, legal, IT, customer service, and our four business units in achieving full team integration. Our commercial teams outside the U.S. are also fully integrated. The last remaining team to fully integrate is the U.S. commercial team. We've identified every role and by the end of this year, the new organizational structure will be communicated. Product training and cross-selling are expected to begin in the first quarter. With the organizational work substantially completed, we've now identified and announced our operating structure from the executive leadership team down through all supporting levels, a real milestone that aligns and strengthens the impact of our entire organization. Although we've made significant strides in integration, our work continues. Our integration program management group continues to track 15 active work streams with milestones identified through the first quarter of 2023 and continued planning for future state operational processes and efficiencies. Teams have been engaged, cooperative and professional, fully embracing the collaborative culture and teamwork needed to deliver on our commitments when we announced the integration of the companies. This process highlights what we've been saying. While integrations are always challenging, we believe the combination of Coidel and Ortho is less complex than other integrations, in part because we aren't consolidating manufacturing facilities, don't have any product overlap, and our commercial teams don't have to start selling one product in favor of another. This merger, although bigger, is certainly simpler and more straightforward than what we accomplished very well with the integration of the Elyra assets a two-year process that required a dependence on transition services and significant third-party involvement to operate the business. Moreover, employees are largely happy with the combination and the opportunities that the combined company is creating. The very high response rate on our recent employee happiness survey demonstrated excellent employee engagement and preliminary results show very favorable responses. To that end, our employee turnover is at expected low levels, giving us confidence that we are securing the talent we need to successfully complete the integration, execute on our strategic priorities, and drive strong, sustainable growth. I couldn't be prouder of our team and our progress. Turning to cost synergies, we have now identified at least $50 million in cost synergies well above our $30 million 2023 target. We are amid our annual operating plan process and believe that there could be further upside. Moving on to product innovation. We are managing approximately 100 R&D projects, and there's opportunity to optimize our focus and our spend. During the quarter, we initiated an R&D portfolio review to rank our projects based largely on NPVs that have been adjusted for technical, market, and regulatory risks. This is helping us prioritize resources for the most important projects. As you can imagine, many of the most important R&D projects are to advance our Savannah, Sophia, and Vitros portfolios. Other exciting long-term projects include LeapFrog, SophiaQ, and our Next Generation Donor Screening Platform which Ortho used to call dry-dry. We will further expand on all of these at our December Investor Day. Today, I'll focus my comments on labs, Savannah, and Sophia. First, our labs business. For the second quarter in a row, the labs business unit launched seven new and refreshed assays globally. And importantly, we received China's regulatory clearance for the Vitros XT3400 chemistry system. With this approval and planned commercialization in Q4, this system will accelerate our China growth strategy by introducing next-generation digital imaging technology that enables higher testing throughput, improved testing accuracy, and best-in-class reliability. We are planning for manufacturing of the Vitro's line of analyzers in China. given localization requirements and expect these efforts to have an impact in 2023. Secondly, savanna. We are seeing demand in Europe and are increasingly confident that savanna placements and revenue will accelerate throughout 2023. We continue to focus on overcoming manufacturing and supply chain challenges as we ramp up production of both instruments and cartridges. Additionally, we completed development activities for all Savannah panels planned for launch in 2023. Yet in the U.S., there are signs that the expedited regulatory path for FDA emergency use authorization is changing, and we now believe that the surest pathway to full availability of Savannah instruments and panels is to include immediately 510 clearance and CLIA waivers. We are making that shift in both our regulatory and commercial strategies so that we can bring Savannah to the U.S. market as quickly as possible. Given the strong demand in Europe, Middle East, and Africa for molecular panels versus the limited opportunity we could achieve by launching in the later stages of the U.S. respiratory season, we are concentrating both our Savannah product output and all near-term commercial activities on Europe. and select other CE-marked countries. That said, we are moving forward on our U.S. launch plan, including the placement in Q4 of about 100 instruments to gather valuable data to support the full U.S. launch in 2023. With our global commercial team firmly in place, we believe a concerted push in Europe, Middle East, and Africa and other countries where we already have government clearances is warranted and can support our planned revenue targets for the year. And finally, Sophia. While peak respiratory virus season is just now beginning, Quidel Ortho's Virena data indicate and the CDC has reported increasing positivity rates of respiratory diseases, including COVID-19, influenza, and RSV. The influenza season began sooner in the U.S. than is typical. with high ILI activity in the Mid-Atlantic, Southeast, and increasing cases in the Midwest. Overall, positivity rates have reached 25.5%, the highest in 31 months, and positivity rates continue to climb. Influenza test revenue was therefore higher than we had anticipated or have seen in the non-slu quarter. On a per-instrument basis, non-COVID SOFIA revenue for the trailing 12 months was the highest since the third quarter of 2021 and continues to strengthen, driven by our full respiratory menu. As anticipated, we didn't see distributors stock up influenza tests significantly in the quarter, but we did see them build significantly higher inventories for RSV and strep, which are much smaller than influenza volumes. Our cumulative SOFIA placements now total 83,000 instruments, up from 80,000 last quarter, which may suggest healthy new instrument placement demand over the next several quarters. Next, global commercial excellence, our third strategic priority. The relationships that each of the US commercial organizations has developed and maintained over the years are strong. To take full advantage of those relationships, we are moving to a structure that Quidel had good success with, in which one team of sales representatives covers hospitals, clin labs, and blood banks, while a separate team of sales representatives works with our distribution partners as a force multiplier to cover physician offices, clinics, retailers, and other points of care. Additionally, with organizational structures in place in the other global regions, we are completing go-to-market analyses across the combined product portfolio. For the remainder of the year, our primary commercial focus is to finalize the integration of the U.S. commercial organizations, close 2022 strong, and be ready to enter our major markets as Quidel Ortho in January of 2023 as scheduled. In the meantime, despite industry-wide challenges in China, And with supply chains, our vitros integrated analyzer install base grew 11% year over year, and automation grew 24%. As those headwinds subside, we expect further penetration into the mid and high throughput lab segment with our integrated analyzers. Moving to our COVID point of care tests, the federal government announced its intent to purchase over 100 million additional at-home rapid tests from multiple domestic manufacturers. We continue to participate in the process and have advanced to the final stage. While we believe our success at some level is likely, the timing is uncertain. We are therefore not including any additional government revenue in our 2022 guidance. In the retail market for COVID tests, we continue to work with all major retail distributors on ways to expand our availability. During the quarter, we returned to shelves at all major retail distributors. And for one, we became their private label manufacturer. We believe that through a combination of current moderate factory output, current inventories on hand, and a strong supply chain, we're in good shape and can quickly scale up if we are confronted with demand surges in this respiratory season. including for respiratory pathogens such as influenza and RSV. Turning now to operational excellence. We're hard at work driving operational excellence throughout the organization with a particular emphasis on leveraging our balance sheet to strengthen supply chains. We believe that our ability to pivot quickly away from sole source supplier agreements could be a competitive advantage especially relative to smaller competitive entrants in our space. As an example, in the third quarter, we brought on more suppliers of semiconductor chips and grew our safety stocks generally, which have improved consistency of the supply of many raw materials. In the future, we believe that a track record of reliable product supply will become a must-have for our current and prospective customers. All companies are facing supply chain challenges, but not all are able to address them equally. Looking at our manufacturing capacity, we have capacity at our Rutherford site that manufactures up to 16 million quick-view tests per week. At our McKellar site, we have capacity to manufacture up to 4 million Sophia casettes per week. And at our Rochester site, we have the capacity to manufacture up to 53 million slides per week. with the two additional lines coming online in 2023 that will get us to 63 million slides per week. We now have approximately 600 open labs instrument orders, relatively flat sequentially. We expect that to modestly increase by the end of the fourth quarter, but we have a plan in place to begin clearing back orders in 2023. Lastly, over the past couple of months, we've overcome Savannah instrument supply chain challenges, begun ramping our instrument manufacturing capacity, and completed the setup and validation of the first of two low volume cartridge manufacturing lines. This allows us to expand our Europe, Middle East, and Africa commercialization for the current respiratory season. Our second low volume line is expected to be run online during the fourth quarter. we believe these two lines should be more than sufficient to meet pull-through demand given the number of instruments we expect to ship. Our two automated high-volume lines are expected to be up and running by mid-2023 ahead of our U.S. commercial launch. Our last strategic priority is capital deployment. A healthy balance sheet and consistent cash generation strategy give us the flexibility to allocate funds toward several strategic priorities. Our priorities are R&D investment, manufacturing capacity expansion, debt pay down, share repurchase, and lastly, strategic M&A. During the third quarter, we announced a $300 million share repurchase authorization. The repurchase program reflects our confidence in our long-term growth strategy the sustainability of a broad base of recurring revenues, cash flow, and the durability of our margin profile. We don't intend to consistently buy back our shares each quarter, and we don't need to complete the entire $300 million in the two years that it's authorized. We put the repurchase program in place to take advantage of what we view as a dislocation in the value of our shares. While the creation of our share repurchase program was particularly attractive in the third quarter relative to debt pay down, looking ahead, we intend to prudently balance our share repurchase program and our debt pay down. The in vitro diagnostic market has historically been relatively insulated from economic slowdowns. However, we are acutely aware of leverage concerns in an uncertain macro environment. We are required to pay down 200 million of our debt each year and have a preference to pay down even more, especially as cash flows benefit from COVID and other respiratory-related revenues that are greater than our long-term plan. With that, I'd like to turn the call over to Joe to further discuss our Q3 financial results and 2022 guidance. Joe?
spk07: Thanks, Doug, and good afternoon, everyone. I'll begin with a bit more detail on our operating results for the quarter. As mentioned previously, to facilitate a comparison of the company's operating performance from the third quarter of 21 to the third quarter of 22, all growth rates that I referenced are presented on a supplemental combined basis, as if Cordell and Ortho have been combined for the applicable periods and may be referred to as supplemental combined information. Starting with a breakdown of revenue on slide nine, In the third quarter, we recorded revenue excluding COVID related revenue of 613 million. And this is up 3% in constant currency driven by point of care and donor screening business units. Transition of Beckman BNP assay sales to Beckman was a 3% net headwind to revenue. So the underlying base business is up 6% year over year. As a reminder, in connection with the settlement of our litigation with Beckman in July, 2021, Beckman started manufacturing and selling BNP assets. We continue to supply Beckman certain asset components for cash payments of 70 to 75 million per year through 2029. The net impact of the arrangement is neutral to gross profit. And the third quarter of 2022 is the last quarter we will experience headwinds related to year-over-year revenue growth from this transition to Beckman. COVID-related revenue totaled 171 million in the quarter. In total, we recorded revenue of 784 million, a year-over-year decrease of 22% in constant currency. Currency translation decreased sales growth by 230 basis points, resulting in total sales decline of 24%. Year-to-date, however, total revenue was up 26% in constant currency to 3.2 billion, excluding COVID-related revenue total revenue increased 8% in constant currency. And year-to-date, the Beckman BNP assay transition was a greater than three percentage point headwind to revenue. So again, the underlying base business was up 12% year-over-year. Turning to our Q3 performance by business unit, point-of-care revenue declined 39% in the quarter but grew 29%, excluding COVID-related revenue. largely driven by pull-through of our broad respiratory menu. These results reinforce our view that the Sophia system has been the beneficiary of tailwinds associated with increased respiratory testing, especially among the 83,000 cumulative instrument placements. Labs revenue declined 5% in the quarter and declined 3%, excluding COVID-related revenue, due to continued challenges in China and with global instrument supply chains. Transfusion medicine revenue grew 1% with mid single digit growth in donor screening driven by plasma demand, partially offset by softness in immunohematology. Molecular diagnostics revenue declined 72% in the quarter and declined 1% excluding COVID related revenue. This is on a relatively low base. As Doug discussed, we are concentrating both our product output and all near-term commercial activities for savannah in europe and select other ce mark countries to meet demand in 2023. now turning to our quarterly performance by geography on a constant currency basis north america revenue declined 29 percent amia grew one percent china declined 13 percent and other regions which includes latin america japan and other asia pac markets was flat Excluding COVID-related revenue, North America revenue grew 6%, AMIA grew 2%, China declined 13%, and other regions grew 9%. North America, which is our largest geography by revenue, delivered strong growth, excluding COVID-related revenue, driven by point of care and transfusion medicine. Point of care was particularly strong due to two orders. an additional order from the 2021 federal government award, and a smaller order from a state government, which combined for approximately $58 million in the quarter. Excluded COVID-related revenue, we grew 6% in North America, driven by pull-through of our respiratory revenue on our large Sophia install base, as well as strength in donor screening. In EMEA, the underlying base business grew 6% year over year, which excludes COVID-related revenue and the impact from the Beckman BNP assay transition. Notably, we had strong growth in Eastern Europe and Middle East and Africa. In China, our team executed exceptionally well despite various macro challenges, including new COVID-19 lockdowns that reemerged during the quarter, as well as continued by local requirements. Importantly, the Beckman BNP assay transition disproportionately impacts our China business, representing an eight percentage point headwind to revenue growth in the quarter. The lockdowns negatively affected patient volumes and caused distribution partners to become increasingly cautious, despite double-digit forecasted fourth quarter end customer demand for consumables. We're monitoring the situation closely for further outbreaks and regional lockdowns, and we'll increasingly manage our channel to meet demand in other regions. Looking to 2023 and beyond, China continues to be a very profitable market and a big investment area for us. We are in the process of expanding our footprint with both analyzer and assay partnerships with the expectation of providing a local manufacturing presence in 2023. Now looking at our revenue by category, recurring revenue, which includes reagents, service, and other consumables, declined 26%. However, The underlying base business was up 7% year-over-year, which excludes COVID-related revenue and the impact from the Beckman BNP assay transition. This is terrific recurring revenue growth driven by across-the-board strength and menu pull-through in our instruments. QuickView revenue was flat, but was up 42%, excluding COVID-related revenue. Instrument revenue declined 20% as global semiconductor chip availability continues to limit our ability to deliver instruments in our labs business. Open labs instrument orders were dealt relatively flat, sequentially at approximately 600 instruments. That said, customer demand continues to be strong and we are prioritizing new instrument placements and integrating instruments in order to maximize our recurring revenue pull through. Now turning to slide 10, I'd like to comment on our third quarter financial performance below revenue versus the prior year, again, on a supplemental combined basis. We delivered a strong quarter performance below the top line. Gross profit margin for the quarter was 56.9%, a 540 basis point decrease versus prior year, largely due to the decline in COVID-related revenue, as well as FX headwinds, partially offset by base business mix. Gross margins were up sequentially from Q2 due to product mix and exceeded our expectations due to strong revenue. And importantly, margins on COVID-related revenue over the last year have come down due to lower volumes and market dynamics. Moving down the P&L, R&D expenses increased 21% year-over-year indicative of our investments in our instrument platforms and menu expansion, including for necessary global regulatory clearances. sales, marketing, and admin expenses were up 4%, driven mostly by distribution cost increases, including COVID-related expenses, partially offset by operational improvements. Adjusted EBITDA declined 48% to $226.8 million, largely due to the decline in COVID-related revenue, as well as an increase in operating expenses. Adjusted EBITDA margin contracted 1,300 basis points year-over-year to 28.9%, better than our expectations due to the strong revenue. Net interest expense of the period was $29.1 million, a decrease of $5 million as anticipated due to lower interest rates partially offset by the increase in the average outstanding debt balances related to the combination. Our provision for income taxes was $21 million, compared to $77 million for the prior year period. We expect a full year adjusted tax rate of approximately 23%, and this is different than an expected gap rate tax rate of 25%. Our adjusted earnings per fully diluted share for the third quarter was $1.85 compared to $4.01 in the third quarter of 21 on a supplemental combined basis. The higher EPS in the third quarter of 2021 was driven by the greater covid 19 volumes and then in the third quarter of this year turning to cash flow and balance sheet on slide 11 in the third quarter and on a gap basis we generated operating cash flow of negative 9.7 million after funding 25 million in capital expenditures and adding back 26 million in acquisition related costs we estimate recurring free cash flow to be a negative 10 million. This third quarter adjusted free cash flow was as expected, and fourth quarter cash flow continues to look strong. We expect adjusted free cash flow in the second half of 2022 to be in the 130 to 150 million range, narrowed from the prior range of 130 to 180 million. In terms of returning cash to our stockholders, We repurchased 953,000 shares of our common stock for $74 million through our new share repurchase program. Although the company was authorized to repurchase the 300 million of our common stock for a period of two years, we aren't committed to spend the full amount and will instead maintain a flexible and balanced approach to share repurchase and debt pay down. We ended the quarter with cash. and marketable securities of $284.3 million and total debt of $2.7 billion after paying down $52 million in the quarter. We ended the quarter with a 1.4 net debt to EBITDA leverage ratio on a supplemental combined basis. And if COVID revenue continues to decline to an endemic level of revenue over the coming year, we expect leverage to increase up to approximately two and a half times. During the quarter, we executed new interest rate hedges that lock in fixed rates for at least 70% of our debt for the duration of our term loans, while leaving sufficient opportunity for an accelerated pace of debt pay down without risking an impact on the recognition of hedge accounting. For 2023, this provides us with a blended rate of 3.16%. Now turning to our outlook for the remainder of the year, On slide 12, first I'd like to provide some broader context in our full year 2022 guidance. The point of care market is showing signs of strength, which we expect to translate into strong non-COVID recurring revenue pull-through on our large base of SOFIA instrument placements. We expect our transfusion medicine business to grow mid-single digits, but instrument supply issues are negatively affecting labs revenue. Savannah sales in Europe are expected to drive growth within our molecular diagnostics business, but all for small base. China is expected to be an important growth driver for our business going forward. However, due to continuing lockdowns and localization requirements, full year revenue in China is expected to be soft. And finally, inflation and global supply chain disruptions continue to be a challenge. We are seeing greater access. semiconductor chips and expect challenges to further ease as we move through 2023. In light of these dynamics, we are updating supplemental combined fiscal year 2022 guidance as follows. Revenue growth excluding COVID-related sales narrowed to the high end of the range at 7% to 9% from a prior 6% to 9% on a constant currency basis. Revenue dollars excluding COVID-related sales is now expected to be 2.48 billion to 2.53 billion from a prior 2.49 to 2.57 billion due to increasing currency headwinds. We are raising our COVID-related revenue guidance to 1.4 to 1.43 billion in 2022 from a prior 1.29 to 1.34 billion And this includes $1.32 billion through the first three quarters. We are raising total constant currency revenue growth guidance, which is expected to grow 6% to 8% from a prior 3% to 6% for total revenue of $3.88 to $3.96 billion up from a prior 3.78% 3.91 billion. Adjusted EBITDA guidance is raised to 1.49 to 1.53 billion, representing a margin of 38.4 to 38.6%. And this is from a prior 1.38 to 1.45 billion, which represented a margin of 36.5 to 37%. Adjusted diluted EPS guidance is raised to $13.20 to $13.80 from a prior $11.80 to $12.75, based on a full year diluted weighted average share count of 67.8 million from the prior 68 million shares. And finally, in addition, I'd like to provide some sense that might be helpful for modeling purposes At current rates, currency translation is now expected to decrease full-year sales growth by 200 to 250 basis points. And this is from my prior 150 to 200 basis points guidance. We expect full-year flu-related revenue to be 230 to 270 million, up from 200 to 260 million. And this includes 176 million in the first three quarters. And at the midpoint, this assumes about a 40% sequential growth for flu and ABC combo from Q3 to Q4. Our flu-related revenue outlook assumes that surges in COVID-19 do not dramatically reduce flu and RSV prevalence, which could shift revenues to COVID at the expense of flu. There are no differences in the number of billing days in 22 compared to 21. And finally, net interest expense is expected to be in the range of 125 to 128 from a prior 118 to 123. With that, I'd like now to turn the call back over to Doug to make a few summary comments.
spk01: Thanks, Joe. In summary, the strong third quarter results enabled us to raise our full year guidance. We're particularly pleased with the pace of our integration and the milestones that we've achieved thus far. as well as the broad portfolio pull-through on our growing placements of SOFIA instruments, and the strong performance of our donor screening business. Thanks to the extraordinary dedication and cross-organizational collaboration of our people, we're achieving critical integration milestones, actively pursuing exciting new cross-selling opportunities, and hitting our synergy targets. And with that operator, we're now ready to open the call for questions.
spk02: Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. If you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question is with Andrew Cooper from Raymond James. Andrew, your line is open.
spk08: Hey, everybody. Thanks for the time here. Maybe first, Doug, if you could just give us a little bit of an update on the Savannah timelines with a little bit more detail in terms of any changes to which assays are leading other than obviously under the EUA and when you expect to actually submit those if you're implying a mid-23 launch. What's the launch assay and how do we think about how those pace through the year?
spk01: Well, thanks for the question, Andrew. Obviously, we're hedging the launch a little bit by suggesting that we're going to be moving analyzers that were slated to be shipped earlier in the U.S. in 2023, and we're moving those mainly to Europe where we think there's plenty of demand and opportunity. There's nothing really that's changed in terms of when the panels will be launched. The only addition is that we're pulling up some of our thoughts with respect to 510 submission. And the reason we're doing that, obviously, is we're in ongoing dialogue regarding potential EUA for Savannah, obviously for the US. And we're in ongoing discussions and dialogue to see what further we need to provide in order to get that done if indeed we're successful. So again, there's nothing really different in terms of the timelines that we've communicated before. It's more that we're hedging. We're making sure that we don't really have a significant change to our revenue expectations for the launch, whether it's 2023 or subsequently the next two years following that.
spk08: Okay, great. And then maybe one just on the P&L a little bit. You talk about capacity expansions in a couple of different places. We've obviously already built up a lot of that through the course of the pandemic on the legacy quite outside, a lot of moving parts with China and general inflation and freight. So can you give us the latest and greatest thoughts on, in a normal COVID environment, how that cost basis is changing in terms of where margins might be? And where, with some of these expansions, they may go relative to sort of the run rate we're looking at right now. That would be great.
spk01: Sure. Another good question, Andrew. I would say that our thinking is shaping over time. And we've already said that, like many others, that COVID seems like it's moving into more of an endemic stage. And if that's the case, and we don't see anything dramatic in terms of a big surge With that particular virus, it just becomes part of an overall respiratory offering. And whether we see rhinovirus infections, adeno, influenza, RSV, or whatever, or including COVID, we're going to need that capacity, whether it's with quick-view tests or with SOFIA tests. Because remember, we're developing menu for both. the particular emphasis on menu for SOFIA. So we're going to need that capacity. On the other side, what we're suggesting is the demand for the slides for the vitro systems has steadily increased. We're adding more manufacturing lines simply because the demand is there. The demand for instruments for a while now has been outstripping our ability to manufacture. We're working through those supply chain and manufacturing issues But at the end of the day, all those things that we're suggesting we're needing to spend capital is because we think that we're going to need the additional volume. I hope that addresses your question. You want to add something, Josh?
spk07: Yeah, Andrew, I was just going to add just to further something Doug just said on the margins. And I think this is probably somewhere in the prepared remarks as well, just to reiterate it, as we move into this endemic stage of COVID, which we think it's going to be 23, but we don't really know. No one really knows, but we think it's going to be 2023. I do expect the margins on the COVID-related products will become closer to what the margins are on the rest of the respiratory panels.
spk01: Which is still quite good. Historically, remember Andrew Lee used to report down a robust respiratory season, flu margins in the mid to high 70s in terms of gross margins. Yeah, I don't really expect a significant margin impact as we move into the endemic stage.
spk02: Our next question is from Patrick Donnelly from Citi. Patrick, your line is open.
spk05: Great. Thank you guys for taking the questions. Doug, maybe a follow-up on the Savannah Peaks. It sounds like you're basically kind of saying if the U.S. gets pushed out, we'll just sell more in Europe. I mean, am I reading through the lines correctly that essentially this, I think you have the 300 million guide out there for a three-year period. No change to that. If US gets pushed out, it's just kind of coming from different places. Is that right? And then I guess with that 300, that guide you do have out there, it's not going to be linear, right? So how do we think about that as we work our way through 23, assuming let's say US gets pushed out a little bit?
spk01: Yeah, Patrick, you're right. When we think about it, we were thinking about an EUA clearance of the RVP4, which has already been introduced in Europe. And at this stage, being in market at the tail end of the respiratory season in the U.S., Would we like to do that? Sure. But would it be a better idea to ship those boxes in that region to Europe where I can continually run the product throughout the respiratory season, make sure I capture the first quarter opportunity, and then also be ready to go globally in the fourth quarter of 2023? So that's the thinking. And you're right. We're not making any change to the $300 million plus target that we had over the three-year period. We're just shifting where we're we're sending the product based on the availability. So we're not going to need to allocate so much as we might have before between the two major continents. So anything else, Joe, on that?
spk05: No, that's fair.
spk01: Okay.
spk05: Okay. Nope. That makes sense. That's helpful. And then Joe, maybe one for you, you know, you talked a little bit about kind of some of the instrument supply chain issues, obviously not alone on that front, but maybe just, kind of talk about the magnitude and how we should think about, you know, what kind of headwind that is. And then the visibility into that normalizing, I think you said kind of throughout 23. So just how we should think about that piece, again, the impact on the top line. And then it was, is that a margin headwind as well as kind of work through it?
spk07: Yeah. So, so Patrick, remember that most, well, really all of that 600 unit backlog that we discussed is on the lab side of the business. And traditionally we, About half of those placements on the lab side would be reagent rental where we keep the CapEx on our balance sheet and the other half would be cash sales. So the margins on instrument sales are typically less than the margins you see on reagents and consumables. So I wouldn't expect there to be an impact on instrument revenue or instrument margins. But we did calculate that if we were able to wind down that 600 unit backlog, it would be an incremental two points of growth for the full year numbers. So, you know, it is fairly significant. And we are seeing signs of improvement on the chip market. Like Doug said, we brought on new suppliers. You know, it is a bit of a game of whack-a-mole sometimes with other parts They come up short, and our global supply chain team is doing a fantastic job on a day-to-day basis keeping those lines up and running. As we said, the backlog has not changed. It's at the same place. And I wouldn't expect that 600 backlog to fully be wound down by the time you get to the end of 23, but I would expect us to make a big dent into it. And it's a little bit of a TBD. We'll probably talk more about that as we move into 2023 on how much of that 600 unit backlog we think we can actually wind down in 2023.
spk02: Our next question comes from Andrew Brackman from William Blair. Andrew, your line is open.
spk04: Hey, guys. Good afternoon. Thanks for taking the questions and glad to be back on these calls with you all. Maybe just First here, and I'll follow up with Patrick's questions around 23. But, you know, you've sort of given crumbs over the last handful of months that point to sort of a high single-digit top-line growth in 23 and call it EBITDA, $850 to $900 million in next year. Not asking for specific guidance by any means, but I guess just at a high level. Can you just sort of talk about some of the building blocks as we head into next year and whether those estimates are still in the ballpark? Thanks.
spk07: Yeah, Andrew, it's Joe. Those estimates are definitely still in the ballpark. You know, FX is definitely a headwind as we move through 2022. And we don't know yet where it's going to go in 23, but I would expect FX to be a headwind in 23 as well. And obviously that impacts the reported numbers. But from a constant currency perspective, I do still feel we feel good about the that high single digit top line growth and it's going to be driven as we've said if you go through the business units the labs business should grow in the range of mid single digit to high single digit point of care should be high single digit to low double digit we should see nice growth in molecular due to the savannah rollout and the transfusion medicine business will grow in the mid single digit so that's That's the math that gets you there. And then as far as EBITDA, yeah, we're still in that same range. But for sure, more to come as we close out 2022 and then get into providing the 23 guidance as we move into next year.
spk01: Yeah, well, first, welcome back, Andrew. What I would add, Joe, is that... three months ago, we weren't as confident as we are now that we are going to see some level of respiratory season as we go into the fourth quarter and into the first quarter. So that helps us with a little bit more confidence. And we did raise the range on that as to what we thought a normal respiratory season would look like, particularly with influenza. So that's probably the only real change versus 90 days ago.
spk04: Okay, great. That's super helpful. And then Doug, maybe a, maybe a crystal ball sort of questions for you, but if you sort of go through the commentary of the other large IBD manufacturers, and when they're talking about sort of endemic market numbers for COVID testing, you just add a few of them up and you get to a market that's probably 5 billion plus pretty easy. And then endemic stage, Would you just love your sort of thoughts around, does that number sound right to you? And if so, how are you thinking about endemic markets here for Quidel moving forward? Has that changed at all heading into this respiratory season? Thanks.
spk01: Yeah, I'll be honest with you, Andrew. I didn't add up all of us together to get the total. I haven't really thought about it, but I will be responsible for our estimates. And I think our estimate is pretty reasonable. Yeah, the 150 to 200. Yeah, I think that's conservative, does not count anything from the government. It's mainly a professional segment. I think there will be a move away from asymptomatic testing, and that part is probably going to go away. So I don't know how much asymptomatic testing would have been modeled in these other companies' estimates. we're not counting on a lot of asymptomatic testing. We're counting on a respiratory season that creates disease and creates a need for people to want to know, and whether that's at the doctor's office or on their own at retail.
spk07: Yeah, and again, reiterating what we said earlier, we expect once we do get into that endemic stage that for us it's just a respiratory season, you know, whether it's COVID or flu or RSV, part of the respiratory panel.
spk01: We've got a cough and a runny nose. Right. I think the public is also predisposed now more than ever to want to be tested to find out what do they have actually.
spk02: Our next question is from Alex Nowak from Craig Hallam. Alex, your line is open.
spk00: Great. Good afternoon, everyone. I was hoping we could continue the respiratory discussion there. You know, it's been a while now since we've had a flu season. It could certainly be a non-respiratory season. You've got flu, RSV, COVID all going around. So when you're speaking with the distributors and the customers right now, I'm just curious, how are they preparing? What's their inventory level? And generally, what's their plan to triage fevers and coughs between testing for flu, testing for COVID, or the combo?
spk01: Yeah, we are getting pinged, Alex, from distribution companies. And in the quarter, we saw two times what we normally would in terms of orders from distribution on RSV. Blue was more like what we would have seen in years prior to COVID, with the exception that there are simply more boxes, so there's more customers ordering. It's hard to forecast, as you know, because you've been covering it for a long time. It's hard to forecast not only the intensity of the season, but the duration. And that's one of the bigger variables. It's just so hard to predict. But at the end of the day, what would you add, Jeff?
spk07: Yeah, I would just add, Alex, that, you know, this flu season did start a little earlier than... than expected. The charts are out there that we can all see. We don't exactly know the duration of this loose season. We had data points from Australia, obviously, but we also don't know if it's going to correlate precisely.
spk01: That's right. I would add something else that I know you already know, Alex. When you look at the combo opportunity, we found ourselves in a situation about a fourth quarter or so ago where customers ordered a lot of the combo product, but the prevalence of flu was low. And you know how it works when your predictive ability on a positive in a low-prevalence situation means that physicians are seeing increasingly false positives, which is not good. So a lot of the mix that we're going to see also depends on prevalence and relative prevalence to other respiratory conditions. pathogens that we're going to see. I know you know all that. I'm just reminding you.
spk00: No, that's good. Again, it's been a couple of years since the flu season here, so that's good. And we've got an analyst day coming up here. Maybe any preview? Should we expect any sort of new system announcements, pipeline development, or just more or less getting everyone on the same page to what to expect from the new Coudal ortho?
spk01: The most important thing I want to achieve, of course, bringing you all up to speed on where we're at, but letting the guys actually get up in front of you so that you hopefully gain the same confidence that I have in them. In other words, we're going to use this opportunity to showcase the talent that we have in the company. I think you'll find it to be quite interesting. We've been working on it already for a while, but we will provide updates. We will be showing instruments so that you may not For example, be as familiar with the B-Trust system. So we're going to have the B-Trust system there for you to take a look at and see how all that works. And the converse would be true.
spk07: Yeah, and Alex will also provide a three-year outlook, too. That'll be in my section. That'll be fun.
spk01: Well recognized. All right, that's great. Looking forward to it. Thanks.
spk06: Operator, we have time for one more question.
spk02: Okay. Our final question is from Casey Woodring from JP Morgan. Casey, your line is open.
spk03: Hi, guys. Thanks for squeezing me in. I guess my question is just can you elaborate a little on why exactly the Savannah U.S. launch is seemingly being pushed out here again? You know, why is that EUA pathway for approval now closed? Is the FDA still backlogged due to COVID, or is there something else going on there?
spk01: No, we're in active discussions, and we are going to continue to pursue it. I'm not going to suggest that we have 100 percent confidence in it, whether it's Point of Care or Mott Complex, but we've been having a number of different conversations around the additional data needed to give the FDA comfort that we should move forward with an EUA. Because it's not 100% certain, we are shifting boxes that we had intended to ship early in the United States to Europe where, frankly, the folks there have been asking for more boxes than we are shipping. So it's just that straightforward. We're hedging, basically. At the same time, I am taking 100 boxes and making those available to customers in the U.S. in the next couple months. so that we can get started doing what we would do normally anyway in the early phases of a launch. So we're by no means slowing down the launch in the U.S., but we do recognize that if we get too far into the first quarter, we're going to miss the respiratory season here in the United States. So that's why we're doing what we're doing. So I want to thank everybody for all your great questions. In closing, our first full quarter as a combined company does give us added confidence in our strategic priorities and our ability to continue delivering strong financial results over the long term. This strong third quarter reflects remarkable cohesion, agility, and performance of the overall team added by the strength of our comprehensive product portfolio and expanded global footprint. The integration is progressing way above expectations, and our employees are coming together even better than we had anticipated. So on behalf of the entire team, I'd like to thank you for your continued support and interest in Quidel Ortho. And just to remind you, our Investor Day will be in New York on December 13th. If you haven't already and would like to receive an invitation, please just reach out to Brian, and we'll do our best to accommodate you. Thanks, and have a great day.
spk02: That concludes today's call. Thank you for your participation. You may now disconnect your line.
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